06/24/2020 14:40 EDT | Updated 06/24/2020 14:49 EDT

Canada Loses Coveted 'AAA' Debt Rating At Fitch

High government debt levels in the years to come will hold Canada back, Fitch Ratings says.

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Canada has lost the coveted "AAA" credit rating at Fitch Ratings, the result of rapidly growing government debt.

MONTREAL ― Canada is no longer among the small group of countries that enjoy the prestigious “AAA” debt rating at the world’s three major credit agencies.

Fitch Ratings announced Wednesday it’s downgrading the country’s debt to the second-highest rating, AA+, due to governments’ increased debt during the COVID-19 pandemic

Canada had been one of only 10 countries in the world to enjoy AAA status at all the ratings agencies, along with Australia, Germany, the Netherlands, Norway, Singapore, Sweden and Switzerland.

Canada still has an AAA rating at the other two credit rating agencies, Moody’s and S&P. An AA+ rating at Fitch puts Canada more in line with places like Austria, France, Hong Kong and the U.S. 

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The country is taking on additional debt at a faster pace than most other developed countries. The Parliamentary Budget Office’s most recent estimate for the federal deficit stands at $256 billion for the current fiscal year, an all-time record.

“Although this will support recovery, the economy’s investment and growth prospects face challenges,” Fitch Ratings said in a statement.

In ordinary circumstances, a credit rating downgrade could have serious consequences for a government, as it could lead to higher interest rates on the money the government borrows. Rising interest rates make it more difficult for governments to cover their debt payments, and can lead to budget crises.

But rising interest rates are unlikely this time around because of the Bank of Canada’s emergency measures to shore up the financial system. The Bank’s “quantitative easing” program is buying up billions of dollars of Canadian government debt, thus keeping demand for that debt high among investors, which ensures the interest on it stays low.

The Bank announced a plan in March to buy up to $5 billion worth of government bonds per week, potentially for a year or longer. That could mean the Bank will buy up to $250 billion of government debt ― or roughly the same amount the federal government is expected to issue this year.

Taking into account provincial debt, Canada’s total government debt will soar to 115.1 per cent of economic output this year, from 88.3 per cent last year, Fitch predicted.

It noted that Canada did a good job of managing an excessive debt burden back in the 1990s, but suggested that differences between provincial and federal policies could make that job difficult this time around.

Still, it expects Canada’s budget deficit to shrink considerably in the coming years as the economy recovers, falling to 6.5 per cent of GDP next fiscal year, and 3 per cent of GDP the year after that. 

Canada had been running a deficit of around 0.3 per cent of GDP before the economic crisis.